Rising Geopolitical Tensions Threaten Oil Supplies

Oil prices are bubbling higher on concerns geopolitical risks to global oil supplies are rising, amid an increase in sectarian violence in Iraq and as Iran reacts to the prospects of increased sanctions.

AP

In the last several weeks, traders point to a confluence of events beyond Iran and Iraq that have added to uncertainty and gained the attention of the oil market.

“You’re seeing more of these events build up and boil over in the Middle East, whether it’s Iraq, Syria, Iran,” said Andrew Lipow, president of Lipow Oil Associates.

The market is also watching Russia, where a contentious election sparked protests and claims of fraud. There is also uncertainty around the change of leadership in North Korea with the death of Kim Jong Il, and also the unresolved governance of Egypt.

Syria is another hot spot. A relatively small producer, the country reported a decline of 30 to 35 percent in its oil production due to sanctions imposed over its violent crackdown on protesters.

But a recession in Europe or any signs of weakness in the U.S. could quickly reverse the trend higher in oil prices, analysts say.

The latest move above $100 a barrel Tuesday was triggered by a comment from Iran’s first vice president Mohammad Reza Rahimi, who said that Iran could shut down the critical shipping lanes through the Strait of Hormuz in the Gulf, if foreign sanctions are imposed on its oil exports.

European officials are currently discussing a ban on Iranian oil imports and the U.S. is looking at other actions, including sanctions on its Iran’s central bank.

Last week, oil rose as violence broke out in Iraq, shortly after the withdrawal of U.S. troops. Lipow notes that Iraq’s oil production is currently at three million barrels a day, the highest level in a decade.

Iran exports about 2.5 million barrels a day, and exports about a third of that to Europe. Based on first half, 2011 data, China is its biggest customer, importing 542,000 barrels per day, followed by Japan, which imports 341,000 barrels a day. Italy is the biggest importer of Iranian oil in Europe, importing 183,000 barrels a day.

NYMEX crude, West Texas Intermediate, gained $1.66 per barrel Tuesday, or 1.7 percent to $101.34, its highest price since Nov. 16. Brent crude, more a gauge of international oil prices, rose 1.2 percent to $109.27 per barrel.

Lipow points out, however, that gasoline did not rise in tandem with oil Tuesday. RBOB gasoline on the Nymex gained 0.16 cents to $2.6888 per gallon.

“What we have is a headline driven market on the Iranian headlines with concerns once again that Iran might try to disrupt oil supplies through the Strait of Hormuz,” Lipow said. “They’re making these statements because they’re concerned about the European sanctions and the U.S. sanctions.”

Iran is currently conducting naval exercises in the Gulf around the Strait of Hormuz, which handles about a third of seaborne oil shipments.

Western governments are balancing the potential of more sanctions against Iran, with the hope of hurting its economy enough to stop its nuclear program, but without creating an oil spike that would hurt the world economy. Analysts say if Europe does ban oil imports, the sanctions may drive more oil toward China. If so, there is some thinking China could then extract a lower price from Iran.

Lipow said he’s currently bearish oil but that it could trade on both sides of $100 in the next year. The increase in Libyan production should help hold prices down.

John Kilduff of Again Capital said the world production picture does favor lower prices, but the oil futures market is currently in a mild contango, where future months’ prices are higher.

“The Iran premium in particular has been building and all of these other (situations) have furthered it. We have more to go . This close over $101 confirms the rally,” said Kilduff, noting oil could move toward $105. But he says the volume is low and he has a cautious view on further gains.

“There’s definitely event risk being priced in here,” he said. “If nothing else, the Iranians have certainly awoken to the fact that they can rattle markets and the Strait of Hormuz is the biggest sabre rattle they have.”

Kilduff said Europe may not sanction oil directly. “I can make arguments for oil to go lower on a fundamental basis. But the geopolitics are too strong,” he said, noting there are also concerns about Nigeria’s production due to violence there.

“We definitely got a lot more serious real quick,” said John Woods of J.J. Woods and Associates. “I think a correction, a drift on the downside would be $96 right now. But the point is, in 2012, you’re going to see more aggressive prices in crude.” Woods said if oil moves ahead toward $105, it would correct by several dollars before moving higher again.

Eugene McGillian, analyst with Tradition Energy, said some of the action in crude has to do with year end “window dressing,” where investors may be adding crude to their holdings. He does not expect prices to go much higher because of the global economy and says WTI oil could move in a range of $85 to $110.

“I do think it’s coming in combination with the year end window dressing, and now the question is will these things continue to accelerate. If they do we have to look for further advances in the price of oil...But if the price of oil starts to firm back up, I think the economic things will be the more important drivers, and that will be if the European debt crisis has been pushed back a lot or if it’s being brought to the forefront,” McGillian said.